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Prof. Ian GiddyNew York University

Corporate Break-Ups


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Copyright 2002 Ian H. Giddy Corporate Financial Restructuring 2

Mergers, Acquis i t ions & Divest i tures

Mergers & Acquisitions

DivestituresValuation

Concept: Is a division or firm worth morewithin the company, or outside it?


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Breaking Up

WhyThe business may be worth moreoutside the company than within

HowSell to another company, or to the

public, or give it to existing shareholders Tax AspectsAs a rule if you get paid in cash

you realize a taxable gain; not otherwise

Effect on ShareholdersThe bigger the part

sold off, the greater the percentage gain


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Case Study: Pinault-Printemps-Redoute

Why?

How?

Tax Aspects?

Effect on Shareholders


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Why Break Up?

Pro-active Defensive

Involuntary

Examples of each?


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Why Break Up?

Pro-active (GM tracking/selling DirectTV) Defensive (ABB selling ABB Cap Lease)

Involuntary (ATT breakup, Enron)

Examples of each?


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Why Break Up?

Post-acquisition disposals Shift of core business or strategy

Underperforming business or mistake

Lack of fit, refocus on core business

Avoid competing with customers

Antitrust compliance Need for funds

Market or litigation risk



Tax Consequences

The spin-off and related techniques havethe advantage that they can be

structured so as to be tax free (USA)

Tax Code Section 355 requirements:Both the parent company and the spun-off

entity must be in business for at least 5

yearsThe subsidiary must be at least 80% owned

by the parent



Breaking Up

Spin-Off Split-Up Tracking Stock

Tax-Free

Divestiture Equity Carve-OutSplit-Off IPO

Bust-Up

Taxable

Breaking up



Tax-Free Breakups

Spin-offspro-rata distribution by a company of all

its shares in a subsidiary to all its own shareholders

Split-offssome parent-company shareholders

receive the subsidiary's shares in return for their

shares in the parent

Split-upsall of the parent company's subsidiaries

are spun off and the parent company ceases to exist

Tracking Stockspecial stock issued as dividend:

pays a dividend based on the performance of a

wholly-owned division


Tax-Free



Tracking Stock

Tracking stock, sometimes known as letter

stock or alphabet stock, is a class of stock

designed to reflect the value and track the

performance of a part of the issuer's assets,usually a separate business or group of

businesses. Claimed advantages:

preservation of the efficiencies of a single

corporationability of the market to more accurately value the

respective businesses of the issuer

What does it really add?



Taxable Breakups

Divestituresthe sale of a division of the

company to a third party

Equity carve-outssome of a subsidiarys

shares are offered for sale to the general

public

Split-off IPOsa private company offers a partof the company to the public

Bust-upsvoluntary liquidation of all of the

companys business


Bust-Up

Taxable



Divest i tures Can Add Value

Shareholders of the selling firm seem to

gain, depending on the fraction sold:

% of firm sold Announcement effect

0-10%10-50%

50%+

0+2.5%

+8%



Divest i tures Can Add Value

Value of combined company

Value of seller without sub + value of sub

(Seller may gain from more managerial focus,

lower WACC, less conglomerate discount)

Value of substandalone value

Value of subacquisition value to

another company



Break-up Compu tat ion

PPR with Finaref PPR without Finaref Finaref Standalone Finaref with CAEBITDA 800 500 300 330

Tax rate 40% 40% 40% 40%

Beta 1.4 1 1.6 1.6

Growth rate 3.50% 2.50% 4% 4.50%

Equity 8,000 6,000 3,000 3,500

Debt 7,000 5,000 0 0

Risk Free 3% 3% 3% 3%Mkt Risk Premium 7% 7% 7% 7%

Debt spread 3% 2% 4% 2%

Re 12.80% 10.00% 14.20% 14.20%

Rd 6.00% 5.00% 7.00% 5.00%

WACC 8.51% 6.82% 14.20% 14.20%

Enterprise PV 16,538 11,868 3,059 3,555

Equity PV 9,538 6,868 3,059 3,555Additional Gains/losses 1,187 0 - 1,400

Choice 9,538 11,114 10,155

Source: breakup.xls



Framework for Assess ing

Restructu r ing Oppo rtuni t ies

RestructuringFramework

1

2

CurrentMarketValue

3

Total

restructuredvalue

Potentialvalue withinternal+ externalimprovements

Potentialvalue withinternalimprovements

Companys

DCF value

Maximumrestructuringopportunity

Financialstructureimprovements

4

Disposal/Acquisitionopportunities

Operatingimprovements

Current marketoverpricing orunderpricng

5

(Eg Increase D/E)



Using The Restructu r ing Framework($ Mil lion s of Value)

RestructuringFramework

1

2

CurrentMarketPrice

3

Optimal

restructuredvalue

Potentialvalue withinternaland externalimprovements

Potentialvalue withinternalimprovements

Company

value as is

Maximumrestructuringopportunity

Financialengineeringopportunities

4

Disposal/Acquisitionopportunities

Strategicand operatingopportunities

CurrentperceptionsGap: Premium

5

$ 25

$ 975

$ 300

$ 1,275

$ 350

$ 1,625

$ 10

$ 1,635

$ 635

$1,000

Eg Increase D/E



Marriot t

The Choice the decision of whether to split Marriott

Corp. into two companies--MarriottInternational and Host Marriott

The Situation decline in real estate values

has a significant percentage of assetsin hotels it had planned to sell

difficult for Marriott to pursue growthstrategies

market price of the company had

declined significantly



Marr iot t: Assignment

Will this type of reorganizationmeaningfully improve the company?

What are the different way of effectingbreak-ups? In the Marriott case, are there

reasonable alternative approaches? Draw up a spreadsheet comparing the

before-and-after capital structure ofMarriott and its proposed component parts

How are bondholders affected? How canthey protect their interests?

Make a recommendation, and justify it.


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Marriot t : Project Chariot

Marriott Corp.

Marriott Intl. Host Marriott Corp.

Intangibles

Franchises Management

Services

DistributionServices

Timeshares

Hotels

Airport andRoad Plazas

Land


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Marr iot t : B reaking Up


Tax-Free


Bust-Up

Taxable

Breaking up


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Marr iot t : Financial Restructu r ing

Marriott Corp. Marriott Intl Host Marriott

Long-term debt 2732 378 2362

LYONs 228 205.2 22.8

Convertible preferred 200 200Shareholders' equity 585 524 61

Total long-term capital 3745 1107.2 2645.8

Long-term debt/Total 73% 34% 89%


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Corporate Restructu r ing

Divestiturea reverse acquisitionisevidence that "bigger is not necessarily

better"

Going privatethe reverse of an IPO(initial public offering)contradicts the

view that publicly held corporations are

the most efficient vehicles to organizeinvestment.


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Con tact Info

Ian H. Giddy

NYU Stern School of Business

Tel 212-998-0426; Fax 212-995-4233

[email protected]

http://giddy.org
http://giddy.org/

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